In a previous essay, we announced a joint investigation by IMANI Africa and the Africa Center for Energy Policy (ACEP), two Accra-based policy think tanks, into a case of possible fiscal recklessness on the part of Ghana’s national oil company, the GNPC.

In our initial analysis, we explained how potential losses of up to $100 million per year could build up for Ghana if the GNPC’s current arrangement with Genser Energy Holdings, a US-based Ghanaian-owned energy company, persists under current conditions. Frequent readers of this site must be aware of our longstanding disquiet about how GNPC’s lack of technical prudence frequently courts financial disaster for Ghana. This inquiry follows faithfully in that tradition.

We intend to explore in a bit more depth the circumstances giving rise to the latest GNPC financial debacle. This essay will thus touch on both the antecedents of the original 16-year contract signed between GNPC and Genser in 2020 and more recent developments to paint a holistic picture of the fiscal risks to the country.

The whole mysterious saga can be traced to an agreement on 20th April 2018 between Ghana Gas, the state-owned gas distribution company (which for a short period, before the advent of the current administration in 2017, was a subsidiary of the GNPC), and Genser in which Genser committed to pay a reasonable price for gas to power embedded/off-grid power plants it leases to various large mines and consumers in the cement and ceramics industries.

Subject to various regulatory decisions and notices, Genser had committed to pay between $6.50 and $7.29 for each unit (mmBTU) of gas received from Ghana Gas as per the so-called WACOG, a regulated price set by the government of Ghana through an industry regulator (PURC).

Around the same period, it was frantically engaging various liquefied petroleum gas (LPG traders) to supply imported fuel for its plants. The logistics of trucking imported propane and LPG from the port being cumbersome and the costs being benchmarked to world prices, Genser’s ideal situation was a more stable domestic source of gas that it could transmit more conveniently, reliably and cheaply via pipelines. Besides, it faced cashflow constraints that made it difficult dealing with the strict European traders it was then buying from.

Having secured a fair deal with Ghana Gas, Genser began to feel that the price paid by the rest of the power industry wouldn’t work for its modular and embedded generation business model. Consequently, it attempted to influence an industry regulator, the Energy Commission, to grant it a waiver of the regulated price so it could cut a deal for a lower price but the Energy Commission wouldn’t budge.

Specifically, the Energy Commission did not regard Genser as “strategic” for which reason it would deserve a special discount and therefore ruled out any arrangement in which Genser would pay a lower price than the state-set amount (WACOG) it had already agreed to in its contract with Ghana Gas.

But what Ghana Gas had no appetite for, GNPC, as usual, couldn’t wait to gobble. As already discussed in the previous essay, GNPC agreed to price gas for Genser at just $2.79/mmBTU (i.e. at a whopping ~60% discount).

To provide political cover for this scheme, the Chief Executive of GNPC wrote to the Ministry of Energy on 10th August 2020 informing the Deputy Minister about this decision and asking for “ratification”.

Somehow, the documented history we have narrated above disappears from the record and a contrived basis is invented to suggest that somehow the proposed $2.79/mmBTU price is a better deal than what the GNGC had signed with Genser.

It is also suggested that because Genser has agreed to provide free passage to GNPC gas to other, third party, customers through its pipelines, some kind of barter arrangement is involved.

Consistent with the GNPC’s less than candid approach, the Chief Executive fails to disclose that the use of the Genser pipelines are not actually free because a “gas compression service charge” applies.

More to the point, even if the GNPC wanted to give a rebate to Genser for use of the latter’s pipeline, there are established costs for pipeline transmission in Ghana that would provide a sense of how much it could have knocked off the WACOG or market price of gas for Genser. GNPC provided no such analysis.

The following year, it decided instead to double up. Its Chief Executive wrote again to the Ministry to justify a revision to the contract for an even greater reduction of its gas sale price for Genser.

Note once again that the massive near- 40% discount is justified on the basis of pipelines to be built in the future for projects yet to be actually realised. Suffice it to say that no such pipeline to Kumasi was built by December 2021.

At this point, through the ingenuity of GNPC, the maximum price negotiated by Genser with Ghana Gas had been discounted by a whopping 77%. Genser stood to pay $1.72 if it built a pipeline to reach customers in the interior whether or not GNPC found the money to build the new power enclave in that part of the country and for which it claimed it needed all this future pipeline capacity (suffice it to say that GNPC has not been able to build the enclave).

Recall also that this was the period when economies worldwide were recovering from COVID-19 and prices in the most actively traded European hub (TTF) had surged past $10/mmBTU.

Genser, frantically raising funds to service debts and stave off harrassing Senior (Debt) Agents, needed the rosiest deals it could find and GNPC was always at hand to oblige. So, $1.72 it was.

The GNPC would also tell various people in policy circles that the source of the gas it was selling to Genser was exclusively Jubilee and TEN. Jubilee and TEN gas are very cheap because Ghana, until later this year, only pays for their processing and distribution costs, but not the gathering and feedstock.

Yet the agreement it had originally signed and the newly amended one would both contain clear “service delivery point” provisions establishing the source of the gas, at least partly, to be from the Sanzule (ORF) facility which is connected to the Sankofa Hub where, according to the same GNPC, gas costs $8.72/mmBTU.

At the same time that it was busily dispensing discounts like candy, GNPC was also busily harassing the PURC (a price regulator in the energy industry) for increments in tariffs due, among other factors, to the growing costs of aggregating gas. With TEN facilities contributing just 2% of the gas GNPC collects and Jubilee offering 28%, Sankofa was now responsible for a full half of all gas throughput. Yet, Sankofa gas was also the costliest for GNPC, at a mighty $8.72/mmBTU. Whilst Jubilee may cost GNPC $2.3 to obtain, a concession from the oil producers whereby Ghana got the gas feedstock itself for free, the concessionary pricing regime was on course to end in about a year and half from the time the 16-year agreement was agreed.

So, at worst, GNPC was willing to take gas at $8.72 from Sankofa and sell to Genser at $1.72. At best, we can use the industry practice, as GNPC itself does, and look at its average cost of sourcing gas, which it says is $7.9 in 2022 and set to rise to $9.37 in 2026, when the contract with Genser would still have ten more years to go.

When the Ministry of Energy was notified of the decision by GNPC as enshrined in the initial contract (2020) to grant those massive discounts to Genser, it was neither alarmed nor deterred by any of this.

The Minister waited for about seven months, during which period the contract was of course in force, and then sent the following gems of ministerial guidance.

Any surprise then that just four months later, GNPC will revise the contract and hand over another delicious 40% discount for yet more phantom pipeline promises?

Clearly emboldened by ministerial laxity, GNPC was now literally giving the gas away. The price of the commodity itself would be pegged at just $0.57 should Genser succeed in closing its fundraiser and build a pipeline for GNPC’s future use in distribution schemes that were then unfunded and very much on the drawing board.

The Ministry’s actions were, and it is easy to guess, in contravention of all settled policy. Just around the same time that GNPC was negotiating with Genser, the country’s highest decision making body in economic matters, chaired by no mean personage than the Vice President, had taken a decision about gas pricing. A decision the then Energy Minister in March 2020 had communicated to the GNPC.

The essence of the decision was simply that gas aggregators (like GNPC) should endeavour to recover their full costs. Full cost recovery and financial exposure mitigation are obvious commonsensical principles dating from Ghana’s first Natural Gas Pricing Policy from 2012. It had been further reinforced in the apparently discarded Gas Master Plan and continues to inform price regulation by the PURC today.

More recent reviewers of Ghana’s national gas policy have reinforced the simple point that in the absence of thoroughly compelling reasons there should be no deviation from the WACOG, as a reflection of average cost recovery across the power sector, in terms such as the following:

It is worth reminding readers that the WACOG, though set below the cost that GNPC says it pays to get the gas it sells, is definitely not $2.79. Or, God forbid, $1.72.

So, even if GNPC does not want to charge its own estimate of a fair price at $7.9/mmBTU, is there any reason why the $5.9/mmBTU WACOG minus any pro-rata transmission charges owing to the presence of Genser’s own pipelines in the mix shouldn’t apply? What exceptional reasons really?

On the point of Genser being somewhat unique in having its own pipelines, it’s worth recalling GNPC’s own numbers of the cost contribution of pipeline transmission to the price buildup.

In essence, one cannot justify a rebate for pipeline transmission higher than half of $0.919 if one wishes to account for Genser picking up the gas midway from their offshore source at the agreed “delivery points”.

Globally, until distances exceed 1,500km (total network length in Ghana is less than this), it is very hard to justify pipeline transmission tariffs exceeding one dollar per mmBTU for natural gas transportation.

In similar light, GNPC’s use of Genser’s pipeline construction and its potential use of same in separate contexts as the basis for discounts is highly suspect given the typically low contribution transportation makes to natural gas project capitalisation.

So, once again, what other exceptional reasons then? Let’s even suppose that the Energy Commission was wrong, and Genser, even though so far it basically just sells power to primary extractors like mines with a sprinkling of cement and ceramics players and is thus far from a massive value addition enabler, deserves to be regarded as a “strategic actor” as the GNPC insists it is. One would still have to look, before going anywhere near subsidies, at whether domestic prices of gas are in fact too high for competitively priced power to be produced.

Luckily, there are well settled methodologies for doing this, such as the use of netback price & value analysis. Done properly, netback analysis can approximate industry willingness to pay and provide robust estimates of gas pricing needed to accommodate breakeven points in the capital investment analysis of various industries. When Ghana last concluded such an exercise, it found that $9 to $12 per mmBTU was a reasonable price range for those industries for which gas-to-power generation makes economic sense.

To cut to the chase, is Ghana’s $5.9 WACOG rate exorbitant? So much so that it must be tempered by subsidies? Is it a “strategic industries killer”? Global comparative analysis does not suggest so. Indonesia, a fast-growing gas market that could offer benchmarks for Ghana in various ways has a $6 WACOG-like price threshold. There too, key industries cluster around the $9 to $12 per mmBTU sweetspot pricing range.

At the time Ghana Gas offered the $6.5 – $7.29 per MMBTU range, the global picture for gas pricing was pretty aligned with the regulatory view in Ghana.

The other question is whether based on the prevailing sentiment during the contract negotiation, a belief that relatively cheaper Jubilee gas could be used for strategic purposes to promote the emergence of a diversified energy conglomerate of Ghanaian origin could have justified that humongous 77% discount. Even that concession, wild as it is, removed from the reality of gas either coming primarily from the expensive Sankofa Hub or at best being commingled and thus costed at the GNPC’s own weighted level, still does not condone the pricing agreed upon in both 2020 and 2021.

The policy position among the country’s experts was clearly that Jubilee gas ought not to be included in pricing indices. And that even if it was, gas prices would not fall below the $4.5/mmBTU range. Taking cue from the logic in the now, apparently abandoned, Gas Masterplan, prudence ought to remain the policy anchor.

It is amply clear from the foregoing that GNPC’s decision to discount the price of its gas to Genser from the $7.9/mmBTU it says it costs on average to produce the commodity, and to deviate from even the regulatory price benchmark of $5.9 (2022) – $6.08 (2020) per mmBTU is suspect. Its further decision to offer the gas to Genser at a prospective amount of $1.72 for 16 years can therefore not be justified at any level on the evidence currently available.

Until GNPC presents compelling arguments to vindicate itself, we must consider the contract as constituting a massive financial loss as follows.

Fair Price of Commodity – $7.9

• Rebate for Buyer Transportation – $0.5

• Strategic Option Rebate for Third Party Delivery via Genser Pipeline – $1

Prudent Net Sales Price – $6.4

Choosing to sell the gas at $1.72/mmBTU to Genser therefore generates a loss of $4.68/mmBTU.

The contract envisages delivery of ~329 million mmBTU over its 16 year lifetime.

The total potential financial loss to Ghana is thus $1.539 BILLION.

Of course this number is an approximation of approximations. But all the trends point to elevated prices for natural gas in the medium-term justifying the projection into the future of these round numbers. It is a very sensible call to estimate losses around this general figure should the contract as currently crafted persist without very sound, genuine, strategic reasons.

The point must be stressed that no one is accusing Genser of wrongdoing. At worst, it is guilty of “excessively effective” lobbying and shrewd negotiation. But it is a private business seeking to maximise the welfare of its corporate backers who are taking risks worth ~$500 million so one can understand. Our focus is thus principally on the role of GNPC, which has a bounden ficuciary duty to prevent Ghana from losing such fantastical sums whether out of sheer incompetence or recklessness.

This essay is part of an active, ongoing, investigation by ACEP and IMANI. Readers with information are strongly encouraged to reach out.

On 27th July 2022, the newswires flashed an announcement by Genser Energy Holdings, a Ghanaian-founded energy company headquartered in the United States (Washington DC) and backed by the powerful Oppenheimer family of South Africa and several other funds and banks.

The announcement concerned the successful closing of two loan facilities totaling $425 million to support Genser’s refinancing of its 2019 and other debts; expansion of its petroleum pipelines (the only privately owned facilities of their kind in Ghana) and port facilities (for its propane and other natural gas liquids – NGLs – trade); and the funding of a greenfield gas processing facility to compete with the current state-owned monopoly at Atuabo.

From its origins in 2007 as a small off-grid energy supplier, Genser is now set for the big leagues. Its first deal in 2007 with Golden Star Resources to supply a 36MW power plant for the miner’s Bogoso site could hardly have predicted the emergence of a sophisticated diversified energy holdings conglomerate as Genser seems now determined to become.

Until “dumsor” struck, and at the height of that excruciating power crisis, Genser found its mojo. It entered into a 5-year power plant leasing and maintenance deal with Unilever to power the latter’s Tema factory. Paving the way for even bigger prospects: three significant deals with major gold producers, Kinross and Goldfields.

It is Genser’s powerplants serving Goldfields in Tarkwa and Damang that, however, have fuelled the massive infrastructure financing deals announced with such flourish in 2019 and July of this year. The country’s gold mines consume more power than the whole of Ghana’s northern sector (equivalent to ~15% of the power distributed by ECG). By positioning itself as the offgrid power supplier of choice to the big gold mines, Genser is paving the path to industry dominance.

Even juicier opportunities lie ahead: the Ghanaian government seems likely to outsource gas transportation for the new power enclave in the Kumasi area it intends to develop around the Ameri plant to Genser. In the course of researching this post, we saw how instrumental letters or support issued by the government attesting to these future deals were in helping the company close its latest funding round.

Whilst there is no denying the growth in Genser’s operations in its 15 years of existence, it is starting to look under further scrutiny that its expansive ambitions of the last few years have sadly been bankrolled at Ghana’s expense.

Careful work by analysts at the Africa Center for Energy Policy (ACEP) and IMANI has revealed that Genser’s operating profits may be heavily dependent on a sweetheart, unpublicised, deal it has signed with the Ghana National Petroleum Corporation (GNPC) whereby it pays a fixed rate of just $2.79 per mmBTU (a unit of energy measurement) for the natural gas it receives from the National Oil Company. There is some evidence to suggest that the GNPC sweetheart deal came after attempts to woo Ghana Gas, the national gas company, by Genser had been less than successful.

Genser’s negotiated gas rate with GNPC is completely mindboggling in a country where the energy regulators assume an average cost of gas of $6.08 per mmBTU when setting tariffs for electricity pricing. In fact, actual gas pricing on the market for various power plant operators (or the government, depending on circumstances) is often higher than this. In 2019, for instance, it averaged $6.91 per mmBTU, and total costs of gas to the industry as a whole amounted to more than $455 million.

In 2020 and 2021, Ghana bought gas at $6.14 per mmBTU and $7.24 mmBTU on average from private producers in its offshore basin and from Nigeria, respectively, to fuel thermal plants. In fact, from the agreement between GNPC and Genser, it is clear that GNPC gets the gas from the J.A. Kufuor Floating, Production, Storage & Offloading (FPSO) facility in the Sankofa Hub, beaches the gas at the Sanzule facility and then handover at a designated delivery point for Genser to transmit through its own pipelines to Damang and Tarkwa to fuel power plants for the gold mines in that enclave.

From the chart below, it can be inferred that this is gas sold to Ghana at $6.14 per mmBTU (down from an earlier rate of $9.59 per mmBTU) and then on-sold to Genser at $2.79 per mmBTU. What is worse, tariff analysis data has suggests an optimal gas selling price of $9.42 per mmBTU if GNPC’s gas trading operation is to be sustainable. A prospect further threatened by the national oil company’s professed strategy of importing liquefied natural gas (LNG) into Ghana from overseas at a cost some analysts contend will hit $11+ per mmBTU at delivery point.

In simple terms, for every unit of gas sold to Genser, a potential loss of $3.35 per mmBTU is recordable. For 2022, the potential loss to Ghana and inferred windfall for Genser is more than $52 million (assuming fully delivered volumes). By 2025, going by natural gas pricing forecasts, the total loss could easily hit $100 million a year.

Genser’s recent good fortune is even starker when viewed in light of its challenging operational history.

From early 2018 to mid 2019, Genser and commodities trader Vitol had an arrangement in which the former was to supply the latter with between 4.7 million and 6.25 million gallons of propane (one of the two main gases found in liquefied petroleum gas – LPG) delivered to a floating facility docked at Takoradi (or roundtripped in a ship-to-ship transfer maneuvre between Lome, Togo, and Takoradi). The price of the propane in 2018 was roughly $0.9 per gallon on average after accounting for the premium charged on OPIS Mont Belvieu pricing (so, for example, Genser owed Vitol $4.24 million for a delivery of ~4.7 million gallons of propane made in February 2019).

Using standard heat conversion factors, one can benchmark this propane pricing to the pricing of the natural gas being sold by GNPC to Genser (natural gas, by the way, is composed mainly of the lighter methane with a bit of ethane). That conversion yields $10.26 per mmBTU. One may, arguably, choose to account for higher propane combustion efficiency so as to reduce the amount to roughly $4.5. The other costs of handling and transportation (including the trucking, floating storage and bunkering costs) have not been fully captured. It is safe to say that just before Genser signed the groundbreaking, never publicised, deal with GNPC, allowing it to switch from LPG to LNG/natural gas, it was paying the likes of Vitol significantly more than $5 per mmBTU equivalent for the feedstock gas it needed to power its plants.

Had it continued to rely on these contracts, then at today’s propane and butane prices, premiums and handling inclusive, its fuel costs from imports would exceed $7 per mmBTU equivalent (applying the same conversion factors). Its serious cashflow problems would have continued to precipitate repeated payment delays, liquidation damages from customers like Goldfields, and eventually the same type of defaults that had to be remedied in an English court of law in July of this year with settlements and costs exceeding $20 million for breach of supply contracts.

But, as we have seen above, Genser managed to convince GNPC to enter a sweetheart deal of ~$2.79 per MMBTU, thereby completely transforming its fortunes. By virtue of its sweetheart agreement with GNPC, it is poised to consume more of Ghana’s precious gas than 9 of the 13 main thermal power plants operating in the country, only slightly behind TICO in 2022, and set to overtake TAPCO in mid-2023. The volume of gas supply committed by GNPC to Genser in the mindboggling contract for the 2025 timeframe will be nearly half the total consumption of VRA powerplants in 2020.

Whilst entrepreneurship of the calibre of Genser is always to be celebrated, the success of private business cannot be at the expense of public good. Every company that pays $2.79 for a critical input that its competitors get for $6.08 will do wonders in the market. More to the point, fiduciaries of public interest like GNPC cannot throw out every hint of commercial prudence to advance the private wellbeing of their corporate favourites.

Purely from a public policy point of view, GNPC ought to have looked carefully at the export price parity numbers to determine a starting point for its deal with Genser. It was amply clear at the time of sealing the deal that natural gas prices were going through a cyclical downturn and that historical trends called for the use of Henry Hub spot benchmarks (applying discounts and premiums as appropriate).

A flexible and market-sensitive pricing regime with appropriate caps, floors, discounts and premiums would have ensured that now that natural gas pricing on the international markets is inching towards $9 per mmBTU, a Ghanaian state-owned company wouldn’t be selling the commodity at $2.79. That spot gas prices were low at the time of concluding the deal is absolutely no basis for not having introduced some kind of market-aligning mechanism into the pricing formula.

No doubt, GNPC will counter with the argument that amendment to the pricing annexure is within their purview and may even have been considered. But the evidence is glaring that Genser’s obscene margins on these trades started to emerge just a few months after the contract was signed and that it has made a total bonanza on the gig. Because of the ridiculous pricing concessions, it can afford to undercut any competitor in its segment of the market, show fantastic future earning potential, and thus attract large investments to further seal its dominance in the private pipeline, gas port logistics, and modular off-grid market niches.

Whilst Genser has a few cement companies in its customer list, it is overwhelmingly a power producer for the primary extractive sector, which many economists argue strenuously undercontributes to government revenues in Ghana. It seems thus very unlikely that even a formal government policy to use highly subsidised gas for strategic purposes would have countenanced the $2.79 per mmBTU sweetheart deal.

The good fortune of the shrewd operators at Genser, interpreted in the light of that unconscionable contract, seems less the outcome of entrepreneurial brilliance and more the byproduct of exceptional incompetence and serious national betrayal on the part of the ever bumbling GNPC.

ACEP and IMANI have only just commenced their investigation into this seeming debacle. Stay tuned.